Despite recent gains in stocks, mutual funds have far to go

Choosing among multiple share classes can be confusing, to say the least. Putnam, for example, has seven share classes for each fund. The American Funds can offer as many as 15, some for targeted distribution channels, such as 529 college savings plans or retirement plans, others for different individual investors. Even though the number of mutual funds was barely changed from 2007 through 2008, the number of share classes jumped to 22,239 from 21,618 last year, according to the ICI.

•Scandals. Although nothing compares with the 2004 market-timing scandal, some fund companies are still running afoul of the SEC. Federal regulators charged the Evergreen funds last month with overvaluing one of its mortgage-backed securities funds. Evergreen paid $40 million to settle, without admitting or denying the findings. Also, last week, the SEC sent a warning to State Street Global Advisors that the company could face charges on losses in some of its bond funds stemming from subprime securities.

Despite the fund industry's problems, Dan Wiener of The Independent Adviser gives it a B for its efforts during the worst bear market since the Great Depression. Low-cost exchange-traded funds, for example, give investors a way to invest cheaply and efficiently.

"It has done a terrific job building the ETF side of the business, and a poor job educating investors about those products," he says.

And, says Michael Lipper, the average fund shareholder's experience the past decade depends upon how much guidance his broker or financial planner has provided.

"Some have done a very good job of calming people, and kept their account holders knowledgeable," he says. "But the do-it-yourself investor, I think, has been hurt."

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